There is some confusion in the Contractor marketplace about the differences of working in a Managed Limited Company versus a Composite Company.

Adopting managed company status is one of the easiest and most cost effective ways of reducing tax risk for those contractors currently operating as a single limited company who are concerned about IR35 but want the tax benefits of being a limited company rather than an Umbrella company employee. Put simply, the Contractor asks a firm of Qualified accountants to ‘manage’ the limited company for them.

The managed limited company is suitable regardless of whether the contract is under IR35 or not. All payroll, accounting functions and statutory obligations for the Managed Limited Company are handled by fully qualified professionals. Under the scheme the contractor simply becomes the only employee and the only shareholder of the managed limited company. The only task that the contractor is required to do is to submit authorised timesheets and a personal claim for allowable expenses along with supporting receipts.

The Composite Company is a form of umbrella company, where each contractor is a shareholder employee each owning their own class of shares. A typical company may have 10 to 12 contractors working through the same company, all with different classes of shares. The company is usually set up and managed by a specialist financial services company or accountant who, in return for a fee (usually a percentage of the fees earned by each freelancer), handles the day to day management of the company including the accounting records, invoicing and payroll.

The management and accounts are structured so that there is a separate profit and loss account for each freelancer, which records that freelancer’s fees and their own salary and expenses. This results in a profit for that individual freelancer, which is then paid out to the freelancer as a dividend, applicable to their class of share – subject always to the need to provide for any additional PAYE and NIC that may be due if the freelancer’s work is caught by IR35.

IR35 – HMRC are focusing on how Composite Companies are operating, especially for contractors who deem their contract to be outside IR35. The Managed Limited Company solution ensures that you are in business by yourself as you are the only employee and only shareholder of the Company. This is a fundamental factor for arguing that the contract is outside IR35. An insurance policy is usually also put in place with the Managed Limited Company, once the contract is deemed to be outside IR35, which gives peace of mind to the Contractor

The Managed Limited Company option can not only resolve tax issues, but it also takes away ALL the responsibility of having your own limited company. Peace of Mind is also gained by the |insurance policy, once the contract is confirmed to be outside IR35. At the same time, you can rest assured that every opportunity is taken to maximise your income.